Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The origi

Question

Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $48,000; it is now five years old, and it has a current market value of $22,500. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $24,000 and an annual depreciation expense of $4,800. The old oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $27,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $2,800 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. Assume a 30 percent tax rate. What will the cash flows for this project be? (Note that the $48,000 cost of the old oven is depreciated over ten years at $4,800 per year. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.) Year 0 1 2 3 4 5 6 FCF $ $ $ $ $ $ $

Explanation / Answer

Statement showing proceeds from sales of old asset

Statement showing depreciation

Statement showing NPV

Since NPV is positive one should buy the new oven

Particulars Amount Proceeds from sale of old asset 22500 BV 24000 Loss 1500 Tax Savings(30%) 450 Total cash inflow 22950

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